A $2M deal paid 100% at closing is a very different deal from a $2M deal with $300K in seller financing and a $200K earnout tied to revenue over the next two years. Same headline. Totally different reality. Understanding deal structure — how and when the money actually shows up, and what risk you carry to get there — is how you stop fixating on the headline and start negotiating the terms that matter.
Most sellers only think about price. Experienced sellers think about structure.
All-Cash vs. Financed
All-cash deals are rare. They make up roughly 15–20% of small business sales. The buyer has the capital ready, closes fast, and takes on zero financing risk. The tradeoff: all-cash buyers usually expect a discount in exchange for the simplicity.
Most deals — about 80% — are financed. The buyer uses some combination of bank loan, seller note, and personal capital to fund the purchase. That's not a bad thing for sellers. Financed deals open up a much larger pool of buyers and often support a higher headline price because the buyer has more sources of capital to draw from.
How SBA 7(a) Loans Work
The SBA 7(a) loan is the workhorse of small business acquisitions. The buyer puts 10–20% down in equity, the bank funds the rest up to a $5M ceiling, and the SBA guarantees 75% of the loan — which gives the bank the confidence to lend at all.
For a $2M business, that's roughly $200K–$400K down from the buyer and $1.6M–$1.8M from the bank. Closing happens once the bank approves.
From the seller's perspective, SBA financing is usually good news. It means a wider pool of qualified buyers. But it comes with one real risk: bank approval is a closing contingency. If the bank says no late in the process, the deal falls apart. The LOI should specify the financing plan: "SBA 7(a), buyer putting 15% down, bank pre-approval in hand." During DD, pay attention to the bank's concerns. Anything that worries the bank becomes your problem.
Seller Financing
A seller note is exactly what it sounds like: you lend part of the purchase price to the buyer. Common structure: buyer puts 20% down, you finance 20%, bank finances 60%. You get paid monthly with interest (typically 5–7%) over three to five years, secured by the business assets in second-lien position behind the bank.
Seller notes serve a real purpose. They close deals that wouldn't otherwise close because the buyer doesn't have enough equity or the bank won't fund the entire amount. They also produce interest income for the term of the note. The risk is what it sounds like: if the buyer's business falters, they might not be able to pay. If they default, you can try to foreclose — but you're now running the collection process, not banking the money.
Here's what that looks like in practice. Purchase price $2M. Buyer puts $300K down (15%). Bank approves an SBA loan for $1.2M (60%). You finance the remaining $500K (25%) on a five-year note at 6% interest. Monthly payments come in at about $9,550 in principal and interest. If the buyer defaults after year three, you have standing to foreclose — but you've still collected three years of payments.
Earnouts
An earnout ties part of the purchase price to future business performance. Example: $1.5M at closing, plus $500K if revenue stays above $5M for the next 12 months.
Buyers love earnouts because they reduce risk. Sellers should be wary. You're betting the buyer will maintain the business and hit targets you no longer control. If the new owner changes pricing, cuts product lines, or shifts strategy — and revenue drops — you lose the earnout money and have no say in the decisions that caused it.
Earnouts typically run 10–30% of the deal price. Minimize them if you can. If you can't avoid one, negotiate hard on the metric. Best case: the earnout is tied to something the buyer directly controls poorly and you directly can verify — gross margin, EBITDA. Worst case: the earnout is tied to revenue or market factors outside the buyer's control. Those get hit by pricing changes, competitive shifts, or a slow quarter, and you lose.
If the business is already doing $5M in revenue with stable customers, an earnout that pays out for maintaining that level is achievable. An earnout that requires 25% growth you weren't already on track to deliver is speculation.
The Realistic Deal
The fairy-tale deal is 100% cash at closing, no earnout, no seller note, no escrow — you're done the day you sign. Most sellers don't get that.
The realistic deal: 70–80% at closing (buyer down payment plus bank loan), 10–20% seller note over 3–5 years, possibly a 5–10% earnout tied to a metric the buyer controls. Escrow of 5–10% of the deal price held for 12–18 months to cover potential indemnification claims. Terms structured to minimize your post-closing risk.
That's what a well-structured deal looks like. Anything further from it in the buyer's favor is a negotiating point.
Tax Implications
This is CPA territory, and it matters a lot.
Cash at closing triggers the tax bill all at once. Seller notes let you spread the gain over the life of the note under installment-sale rules, potentially reducing your effective rate. Interest payments are ordinary income; principal is return of capital. Earnouts are taxed based on how they're structured — sometimes ordinary income, sometimes capital gains. Stock vs. asset sale treatment has dramatically different consequences, and for stock sales a Section 338 election can sometimes convert asset-sale tax treatment to capital gains.
Before you commit to a deal structure, run the tax impact with a CPA. The difference between a well-structured and poorly-structured deal can be $250K+ in taxes on a mid-sized business. That conversation pays for itself.
What to Push For
A working seller's priority list: maximum cash at closing (70–80% minimum), minimal seller financing (3–5 years max if you have to carry paper), earnouts tied to metrics the buyer controls at current performance levels, short survival periods on reps and warranties to limit post-closing liability, and escrow capped at 5–10% rather than the 15–20% buyers sometimes ask for.
You have leverage in these negotiations. You're the one with the business. If the buyer won't move on price, move them on terms. If they won't move on either, the next buyer is worth waiting for.
Ready to structure a deal that actually protects your outcome? Torch helps you model cash, SBA, seller-financed, and earnout structures side by side — so you can see what each offer really pays, when, and at what risk.